Starting a New Business
Starting a new business can be a stressful but hopefully an exciting time for the business owner. The most difficult thing a new entrepreneur will face will be the initial decision of what sort of business to start operating and secondly the financial issues surrounding the new venture.
This is especially true when the new business owner is ‘making the leap’ from a full time employed job to self employment. Most new businesses need some time to get going and start generating the business owner the cash that they need personally as well as professionally in order to fund the business moving forward.
Getting sales is only part of the story, collecting payments from customers is ultimately when the time when the job is complete and it is extremely important to note that when a sale is made it means nothing unless the customer pays!
What new business have you chosen?
This is obviously critical and I will assume that you have thought of a suitable business to begin with.
This guide is a basic guide for consideration and is not a comprehensive guide to setting up a business. Below we discuss some common aspects of business startups, but there is not room here to go into every aspect. Indeed very large books and websites have been written dedicated to the subject!
These notes are written in the best faith, but we cannot be responsible for any reliance placed on the information below as each business is unique and there are many varying aspects.
What is a Forecast?
It is highly recommended that before commencing a business, a full forecast is put together that examines the financial aspects of the business and takes into account all the expenses that go with running the business. The forecast is crucial at it enables a new entrepreneur to see clearly what level of sales is required to achieve the profit required from the business. A forecast is often required by banks or investors in the business.
Forecasts can be optimistic or pessimistic. We recommended that three versions of the forecast are made, an Expected Forecast, an Optimistic Forecast and most importantly a Pessimistic Forecast or worse case scenario. Even if these variations are kept for internal use and not supplied to potential investors it is important for the business owner to be aware of and considerate to these three forecasts to help establish the feasibility of the business strategy.
What is Profit?
This may sound like a daft question, but it is very important to understand what profit is and how this relates to cash. A business has to be profitable otherwise the whole purpose of the business is questionable. There may be times that a business makes a loss and this can be expected and normal provided proper planning is in place.
Once a business makes a profit, it does not necessarily mean that it has made any money and most small businesses soon realise that the cash flow of the business can be more important.
EG You buy a stock item for £250, you pay immediately for the item from your supplier and sell it for sale for £500. It is clear from the above example that you have made £250 profit, (in simple terms).
What is Cash Flow?
Again, this may seem like a silly question, but many many profitable businesses go out of business because they run out of cash to fund the business. As mentioned above, a sale is only the start and the actual physical receipt of cash is extremely important. Depending on your business type, some customers may not pay you immediately for goods and services and whilst you are waiting for customers to pay you need to be able to fund any expenses. This problem is exacerbated by the fact that new businesses find it hard to acquire favourable credit terms with suppliers and the new business owner might be tempted to give their new customers favourable credit terms to get a sale.
This can be fine if a proper forecast as above has been prepared that examines cashflows as well as profit. The business needs to bridge the ‘cash gap’ with its own funding.
EG You buy a stock item for £250, you pay immediately for the item from your supplier and offer it for sale for £500. You sell the item to a commercial customer who has negotiated 30days payment terms. It is clear from the above example that although you have made £250 profit, (in simple terms), you have minus £250 in cash until that customer pays. This money has to be provided from somewhere.
The first question most new business researchers find themselves with is ‘what form should I setup the business as? Should I be a Limited company or Sole Proprietor? This subject comes up a lot and it is an important decision, but having a sound financial basis for the business is more important.
Simplistically there are two main types of business:
Self Employed/Sole Proprietor/Partnership
These business types are all self employed business types. Each business has to be registered as a self employed business with HMRC. The dealings of the business are the responsibility of the business owner and the legal identity of the business is the same as that of the business owner/s.
Most importantly, Limited Companies are separate legal entities to the business owner and therefore the main advantage of Limited Companies is that the risk of the business is held with the business and not the business owner. Generally the business owner is an employee of the Limited Company and controls it through shares in the business.
It is very important to note, however, that in most cases business loans achieved through the bank is usually secured on the directors of the Limited Company thus circumventing the Limited Liability of the company.
There are many tax variations in the options you choose and we would always recommended seeking professional advice if unsure of the implications of how the business is to be setup. Each business is unique and there is no easy guide as to which option would suit your business best.
Do I need an Accountant?
Not necessarily! Depending on what you are doing and the ability of the business owner to deal with the financial affairs of the business an accountant is not a legal requirement or a necessity. However, if a business owner is unsure of the implications of any aspect of the financial side of the business it is recommended that professional advice is sought. In many cases it is not so much the ability of the business owner to understand the financial aspects and administration of the business, but indeed, if the business owner is able to dedicate the time and if it is cost effective to the business for the business owner to spend the time dealing with this aspect.
At South Coast Accountants, we believe that the business owner should be able to do as much or as little of the financial administration of the company as they feel comfortable with. We can do as much or as little of ALL the administrative requirements of the business.
All businesses need to keep accurate records of the financial transactions it has conducted. Ultimately this means keeping records and depending on the size and nature of the business concerned a financial system may be required to do this.
It is important to note that financial records should not be kept solely for legal and regulatory requirements only. It is often forgotten, especially in small business, that financial records are extremely important in assessing the financial performance of a business for management purposes.
This is where a good financial system can really be advantageous to the business owner. Many business we come across have kept records in file format and then the accounts are constructed at the year end to meet the regulatory requirements. Of course, 6-9 months after the year end is complete the accounts are often finalised. At this point it can be too late to critically analyse the accounts and make effective business decisions from them.
It is recommended that the business’s financial position and performance is reviewed at least monthly to give a good indication of the challenges ahead and any potential problems that may arise.
In the case of IT records make sure that your systems and files are regularly backed up and kept secure separate from your computer. This is a weak are of many small business.
At South Coast Accountants, we can help you in this area also!
See the separate article on VAT for a more detailed look at VAT implications in a business. It is not so scary!
Golden Rules for New Businesses
· Do a proper detailed business forecast covering at least the next twelve months plans for the business.
· Have financial backup plans and consider worse case scenarios. How long can the business keep going without income?
· Open a business bank account. Do not be tempted to use a personal bank account for business purposes.
· Get a business credit card or debit card. Again, do not be tempted to use a personal credit card for business purposes. Business cards can be more expensive than personal cards, but if a personal card must be used, try and have one solely used for business purposes.
· Keep all paperwork. It is better to keep more than is necessary than less.
· Consider getting a financial system, especially if you are expecting high transactional volumes. Make sure it is updated regularly - at least once a month.
· If you are unsure of any aspect of the business’s obligations do not ignore it! The problems rarely go away on their own.
· Get a good accountant, we are one of them!
And finally, YES, we can help you if get a problem in this area.
Contact us for a free initial consultation.
South Coast Accountants Ltd
11 St Michaels Road
We can organise and run your whole financial administration as well as ensure that your regulatory responsibilities are met. Bookkeeping, Payroll, & full financial system maintenance is available.
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